Searching for the bottom

Analysis |

During the last six recessions, the revival of housing sales has been among the first signs of a recovery. So does Wednesday's news that the number of real-estate-sales contracts signed in February rose by 2.1 percent mean that the overall economy is on the mend?

"Housing is going to be the first clue that we're heading out of this," says Dirk Van Dijk, of Zacks Investment Research, "just like it was (the first clue) that we were heading in."

But one good month shouldn't convince anybody that house prices have bottomed and the recession is on its way out. What economists want to see is another month of rising house sales and similar upward moves in other housing data.

Even more important than watching sales data to detect a bottom is watching inventories of unsold houses. Until a combination of more sales and fewer foreclosures begins to reduce the number of houses on the market, prices won't rise and most would-be buyers will stay on the sidelines.

The trend looks positive here, too. According to the most recent reports, the backlog of unsold houses dropped from 12.9 months' worth of supply in January to 12.1 months in February.

If this keeps up, happy days may soon be here again.